6 Levels for Storing Your Bitcoin

For anyone new to the space, things may seem a little confusing when first learning about Bitcoin. If it’s a digital currency, why do I need to “store” it somewhere? How can it be taken or lost? Isn’t it just on my phone or in my account with the exchange I bought it from? Isn’t it stored like how stocks are handled by my brokerage firm? All valid questions and we hope to shed some light on why Bitcoin is managed differently than other assets. By providing various scenarios and use cases, we want to provide you with enough information to start thinking about which storage solution, or combination of storage solutions, will benefit you the most for your unique situation.

Level 1 - Use an exchange

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How it works:

A Bitcoin exchange is just like a brokerage firm where you have an account and are able to purchase available company stocks, in our case Bitcoin. For most centralized exchanges, you will need to provide them with a few pieces of information before being able to purchase bitcoin.

Exchange requirements:

• Email
• Cell phone number
• Copy of your driver’s license 
• Recent photo of yourself 
• Date of birth 
• Social security number
• Home address 
  

Everything above is needed for exchanges to comply with KYC and AML regulations. For most exchanges, they will be unable to provide you with all of their services without that information. After the sign up process is completed, you may have to wait anywhere from a few hours to a few days to begin transferring funds and purchasing your first amount of bitcoin. Once you have purchased your bitcoin, you then have the option to leave your funds on the exchange without moving it to a storage device.

Skills required:

• Basic computer skills (email, using the internet, taking photos).
• Need to know how to transfer funds from a bank to an exchange.
  

Benefits:

• Convenience. No extra steps are required from the user.
• High volume and liquidity to quickly purchase or sell your Bitcoin holdings.
• Access to customer support.‍

‍Risks:

• Your bitcoin is controlled by a third-party.
• The exchange may not have the Bitcoin they claim they owe you. If an exchange is unable to provide their customers with the promised Bitcoin, it is uncertain how long it would take for the exchange to fulfill each obligation.
• Periodic downtime.
  

Use case:

Fastest storage solution for someone who does not plan on moving their Bitcoin onto another exchange, custodial account, or wallet. If you decide to use an exchange as the place to store your Bitcoin, please be aware of previous incidents with other exchanges losing their clients’ funds.

Level 2 - Use a custodial service

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How it works:

Custodial services are offered for clients or hedge fund managers with large sums of capital. The main responsibilities of these custodians are to manage all the client’s Bitcoin in a safe and secure manner. Fees for management will usually be paid on an annual basis. 

Skills required:

• Basic computer skills to fill out online forms.
  

Benefits:

• Convenience.
• Catered 24/7 support.
• Easy liquidity for hot storage (connected to the internet).
• Great security for cold storage (offline and cannot be accessed unless physically present).
• Combination of hot and cold storage.

Risks:

• Third-party services are prone to attacks from bad actors externally and internally.
• Cannot move funds without the third-party knowing.
• The third-party could potentially lose your sensitive data.
• Hot storage is more prone to malicious attacks because it is connected to the internet.
• Cold storage is less liquid and difficult to trade if funds are needed quickly.
  

Use case:

The most convenient storage solution for those who want to be hands-off when investing in Bitcoin. For institutional and hedge fund managers, custodial services are usually the best solution when dealing with large sums of money. Depending on the firm’s risk tolerance, it may help to learn how to self-custody or store portions of their Bitcoin funds with numerous custodial options to diversify their holding’s locations.

Level 3 - Use a mobile wallet

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How it works:

If you have some Bitcoin on an exchange and are ready to move your funds onto a storage device, a mobile wallet is a good first step to consider. On any mobile device (may be best to have a phone that is 4 years old or newer), you may download a wallet from the Google Play Store or Apple App Store and search “Blue Wallet”. Blue Wallet is reliable and can support on-chain and off-chain transactions. There are plenty of mobile wallets to choose from but Blue Wallet should be a good place to start and will meet all of your needs. During set up, the mobile wallet will prompt you to create a backup for your wallet. This will require you to write down the 24 word seed phrase that is provided. Make sure to not share the seed phrase with anyone, and have multiple copies stored in multiple locations.

Skills required:

• Basic smart phone skills (download apps, typing, copying and pasting, email, camera).
• Must know how to send and receive Bitcoin.
• May also need an account with an exchange (not required) to send Bitcoin to the mobile wallet.
  

Benefits:

• Inexpensive.
• Fastest way to set up a Bitcoin wallet.
• More secure than an exchange account. Funds may be recovered on a new phone if the seed phrase is still in possession.
  

Risks:

• If the phone is lost and there is no access to the seed phrase, the funds are also lost.
• Must make sure to download the official mobile wallet app.
• Mobile viruses and malware are a potential problem when connected to the internet.
  

Use case:

Mobile wallets bring an extra layer of security for those who want to secure their Bitcoin. Most may use a mobile wallet as a more convenient way for spending their Bitcoin while not necessarily storing large amounts. Users may use a mobile wallet in combination with other storage options. Mobile wallets are also the perfect introduction for those beginning to learn how to use wallets and become more comfortable with transferring funds.

Level 4 - Use a desktop wallet

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How it works:

A desktop wallet is similar to a mobile wallet in the way it is set up. The major difference is that it is less convenient to use than a mobile wallet. Blue Wallet also has an app for desktop.

Skills required:

• Proficient computer skills (download apps, typing, copying and pasting, email, camera).
• Must know how to send and receive Bitcoin.
• May also need an account with an exchange (not required) to send Bitcoin to the desktop wallet.
  

Benefits:

• Inexpensive.
• More secure than on an exchange. If the hard drive of your computer fails, you may recover your funds by downloading the app onto a newly installed hard drive.
• More privacy with a VPN along with other measures to hide internet activity.
  

Risks:

• Losing the seed phrase will result in losing the funds stored on the desktop wallet.
• Must make sure you are downloading the official desktop wallet app.
• Risk of viruses and malware when connected to the internet.
  

Use case:

A desktop wallet is also a great way to learn how to transact with Bitcoin. A lot of people will use desktop wallets in tandem with their hardware wallets for more privacy and other features that a web* wallet does not provide.

*Web wallets are similar to mobile and desktop wallets except that they will usually require an email with a password. The private keys to a web wallet are stored on a server rather than locally on a hard drive in a mobile device or desktop. Since a web wallet is always connected to the internet, it would be considered a hot wallet.

Level 5 - Use a hardware wallet

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How it works:

Hardware wallets are the most popular storage solution for retail investors within the Bitcoin community. By having a separate device specifically used for storing their Bitcoin, the process for storage is more streamlined and provides a more secure all-in-one solution. Private keys are stored exclusively on the device and will never be exposed online. When deciding on what hardware wallet to purchase, make sure you always buy directly from the company website in order to avoid the risk of being sent a tampered device from a third-party seller. 

After receiving the hardware wallet, you will then be able to connect it to your computer via USB-A or USB-C. Depending on the manufacturer, you will either need to download the accompanying app or be directed to a web UI where you will go through the steps to set up the device. All hardware wallets require you to write your seed phrase down and verify that you have correctly copied it down. You will also be prompted to set up a pin for initial entry to the device for every use. It also does not hurt to set up a passphrase (25th word) as well with your device. Be sure to save all of this information on paper and have it stored in an appropriate place. Laminating this information or having it engraved on steel plates is also a more secure method.  

Skills required:

• Proficient computer skills.
• Hardware wallet setup.
• Hardware updates. Must be diligent and thorough when doing so in order to avoid imposter updates.
• Must be comfortable using the features on a hardware wallet.
  

Benefits:

• Secure solution for cold storage.
• Private keys always stay offline.
• Pin encryption increases security.
• Immune from malware or viruses from a computer.
• Needs verification to access funds on the physical device.
• Open-source firmware that may be reviewed by the public (depending on the wallet).
  

Risks:

• Losing the 24 word seed phrase will result in losing the funds stored on the hardware wallet.
• Not the most straight forward setup for beginners.
• Phishing attacks are possible by getting unsuspecting users to give their seed phrase to bad actors (never type in your seed phrase on a computer).
  

Use case:

Hardware wallets are best used for storing funds that do not need to be accessed on a regular basis. These devices may be brought out every few months to generate a new wallet in order to send or receive a certain amount of Bitcoin.

Level 6 - Setup a multisignature system

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How it works: 

Multisignature (also known as multisig) allows you to store your Bitcoin with multiple keys (multiple hardware wallets). This ensures that no transaction from a wallet is possible without the consensus of at least 2 of the 3 signatures. In some cases it can be up to 3 out of 5 signatures required for approving a transaction. The steps for achieving this would require the same initial set up with a hardware wallet but must be done 3 times with 3 separate hardware wallets. A desktop wallet like Electrum will provide an interface for you to configure the multisig set up. Once everything is configured properly with Electrum, two of the three hardware devices must be plugged into the computer in order to approve transactions being sent from the multisig wallet.

Skills required:

• Proficient computer skills.
• Hardware wallet setup.
• Must also know how to set up a desktop wallet.
• Hardware and software updates. Must be diligent and thorough when doing so to avoid imposter updates.
• Must be comfortable using multiple hardware wallets.
  

Benefits:

• One of the most secure solutions for cold storage.
• Private keys always stay offline.
• 2-3 multisig setup is very secure. If one wallet is compromised, you will still be able to access your funds with the other 2 devices.
• Immune from malware or viruses from a computer.
• Needs verification to access funds on the physical device(s).
• Open-source firmware and software that may be reviewed by the public (depending on the wallet).
  

Risks:

• Losing the 24 word seed phrase of 2 devices is less likely to occur but still possible.
• Setup requires more time and steps than setting up a single wallet. Multiple seed phrases, pins, and locations may overcomplicate what is needed for some people.
• Phishing attacks to get unsuspecting users to give their seed phrase(s) to bad actors is much less likely to happen because at least two devices need to be compromised.
  

Use case:

Multisig is a great way to have redundancy in your security setup. It allows you to store your own keys while it greatly decreases the risk of losing access to your Bitcoin. By having your Bitcoin stored with 3 (some options allow more) keys, you are able to still access your funds if 1 of those keys is missing or compromised.

Combinations of use cases for the above storage solutions:

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Everyone is in a unique situation and because of this, there isn’t necessarily a one-size-fits-all solution. In fact, if we think in terms of how much of our holdings should be allocated toward each storage solution, the possible combinations are endless. You can think of allocation in terms of the percentage of funds you are willing to store in a hot versus cold wallet. Below are a few scenarios that may relate closely to your situation and provide a few ideas to start with:

1. 10-10-80 rule

The percentage of allocations can definitely be adjusted to your specific needs but this should give you an excellent starting point. 10% on an exchange if an emergency comes up, 10% in a hot wallet for spending, 80% in cold storage for savings. 

2. 50/50 rule

This can be used in multiple ways depending on the combination of storage solutions you choose. 50% could be distributed in multiple hot wallets or exchanges while the remaining 50% may then be allocated to cold storage.

3. 99-1 rule

This option may work for those interested in a very long term storage solution. 99% in a multisig configuration while the remaining 1% may be left on various exchanges and hot wallets.

4. A bit of everything

If you’re more of a tinkerer, then it may be worth trying out every type of storage device and to distribute your funds evenly in a specific ratio. In the long run, it will help you decide on what works best for you.

Learning about all of the available types of storage solutions to Bitcoin is the first step to sovereignty. The second step is to act on that knowledge while consistently practicing. There is no need to rush into trying every storage device but it is helpful to know all of the benefits and risks involved with each decision.